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Currency watch: Fears grow over US economy
We are still looking at a very mixed picture for the UK economy with some retailers seemingly dying on the high street in front our eyes.
Needless to say the Bank of England (BoE) interest rate decision on Thursday went according to the playbook – no change in interest rates, being kept on hold at 0.5% and no further plans for quantitative easing (QE).
The BoE is unlikely to make a move on either until the end of 2011 at the earliest.
The BoE meeting minutes, published in two weeks’ time, will add more direction to sterling when we hear how each of the nine Monetary Policy Committee members voted. If any of the members have changed their stance, either moving from a hike in rates to a hold in rates or from a hold in rates to more QE, expect sterling to weaken.
However, if any members have taken a more hawkish stance we may see some sterling strength. The likelihood is that the lack of a rebound in the UK economy will keep members chatting about further QE, however.
On foreign shores the situation continues to decline however, with there being considerable fears over the state of the US economy.
The ratings agency Moody’s followed up on its promise made in June that it would downgrade the outlook for the US economy to negative if significant measures were not taken to deal with looming debt ceiling expiry.
It argued that they had taken the decision “given the rising possibility that the statutory debt limit will not be raised on a timely basis, leading to a default on US Treasury debt obligationsâ€.
It also stated that even if the ceiling is raised it must come alongside a deficit reduction plan to sort out the massive pile of Uncle Sam’s debt.
American government-sponsored enterprises such as Fannie Mae and Freddie Mac alongside Federal Home Loan Banks were also put on review for a downgrade.
A US rating downgrade would be apocalyptic for the world economy and would make the post-Lehman brothers collapse look like a picnic.
Jeremy Cook is chief economist at World First foreign exchange